RBC Prepares to Blaze Trail With New Bail-In Eligible Bonds

The Royal Bank of Canada will be the first Canadian financial institution to sell bail-in eligible securities. The bail-in eligible securities can be converted into equity should a bank get into trouble and will eventually replace deposit notes for Canadian banks.

Royal Bank of Canada is getting ready to sell the country’s first bail-in eligible senior securities.

Canadian lenders will be able to start issuing the new securities after Sept. 23, when the bail-in framework is officially put in place.

The bail-in regime has been in the works since 2013 when the Canadian government first said it would take steps to manage the risks of banks labelled “systemically important” by the country’s banking watchdog, the Office of the Superintendent of Financial Institutions.

Regulators worldwide have been working to prevent a repeat of the 2008 financial crisis, which saw developed nations recapitalize failing lenders with taxpayer money to keep them from further harming the economy — only to face a backlash from taxpayers. Canada has largely avoided that fate, but wanted to be better prepared for the contingency.

The bail-in eligible securities are riskier than deposit notes because they can be converted into equity in case a bank gets into trouble. They will gradually replace deposit notes, the cheap and versatile source of funding for Canadian banks that’s become the backbone for the country’s corporate bond market.

It’s unclear how much interest, or spread over federal government bonds, banks will have to offer investors in exchange for taking on more risk than associated with deposit notes. In most recent deposit note sales from last week, Toronto-Dominion Bank reopened its March 2021 notes at a spread of 64 basis points, while Canadian Imperial Bank of Commerce sold three-year notes at a spread of 72 basis points.

“My estimate was about 15 to 20 basis points over deposit notes, but banks argue it should be 5 to 10 basis points, because of how investor-friendly Canada’s bail-in regime is,” said Himanshu Bakshi, a Bloomberg Intelligence credit analyst. “However, it depends on investors if they are OK with getting five basis points more for a lower-rated security.”

There are about C$149 billion ($115 billion) of deposit notes outstanding, according to data compiled by Bloomberg, which represents roughly a third of a Bloomberg Barclays Canadian corporate bond index. Most deposit notes were sold as three- to five-year securities, but Canadian lenders have gone for longer maturities such as 10 years in recent months as well.

The last of the legacy deposit notes are due in less than a decade. These are Bank of Montreal’s C$2.5 billion of 3.19 percent March 2028 notes that the bank reopened on Aug. 29, and C$2 billion of 3.1 percent securities due February 2028 that were priced by Bank of Nova Scotia on the last day of January this year.

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